What to Do if Student Loans Are Sold to a Collection Agency
When student loans are in default for too long, they may be put in collections. If your student loan is sold to a collection agency, there can be financial consequences. Continue reading to learn more about what to do if your student loans are sold to a collection agency!
What is a collection agency?
A collection agency is an entity that recovers unpaid debt from borrowers who have defaulted on their loans. Federal student loans go into default after 270 days of missed payment. When student loans default, they become accelerated, meaning they become due in full immediately. This is when an assigned collection agency will try to retrieve the debt.
What happens in collections
Collection agencies urge borrowers to pay their overdue debt. They do this using phone calls and letters. When a borrower’s student loan is in collections, the collection agency will contact them. Contact will continue and become more frequent if the borrower does not respond. Contact will continue and become more frequent if the borrower does not respond.
Collections can also have financial consequences. Borrowers will be responsible for all the costs that the lender incurred from the collections process. If your loan is held by the Department of Education, these costs will be 17.92% of your total loan amount. This can increase your total debt drastically. For example, if your loan balance is $30,000, collections costs could add $5,376.
If you do not repay your debt or enter into a repayment agreement, the collection agency will begin wage garnishment. The Department of Education can take up to 15% of disposable pay from your paychecks for the defaulted loan. Disposable pay is what remains of your paycheck after deductions such as taxes. Once wage garnishment starts, it will continue until the debt is repaid or the default is resolved.
As long as student loans are in collections, they are also in default. Student loan default has additional consequences that you want to avoid:
- Borrowers can become ineligible for additional federal student loans.
- Borrowers become ineligible for deferment.
- Defaulted loans remain on a credit report for up to 7 years, which can lower borrowers’ credit score and their chance to get other loans or credit.
Also read: How do student loans affect credit?
Rights in collections
Collection agencies may use aggressive and frequent tactics to make a borrower pay their debt. The FTC enforces the Fair Debt Collection Practices Act (FDCPA). This act makes it illegal for debt collectors to use abusive, unfair, or deceptive tactics when collecting debts. The FDCPA lays out rights for borrowers who are in collections. It’s important to know these rights so that you can report a collection agency that violates the rules. Some of these rights are:
- Collection agencies cannot contact borrowers before 8am or after 9pm
- Collection agencies cannot contact borrowers’ work if told not to
- Collectors cannot use threatening or obscene language
- Collectors cannot make threats or lie about the debt
How to get out of collections if your student loans are sold to a collection agency
If your student loan debt is in collections, the first thing you should do is respond to the collector. Ignoring them will not make contact stop and can potentially make it more frequent. Respond to the collector by sending a letter. If you’re not sure what to say, the Consumer Finance Protection Bureau provides letter templates for a variety of collections situations. Remember, the collection agency wants you to pay. They may respond with repayment options such as a repayment plan or a lump sum payment.
Another way to stop collection activities is to resolve the default on the student loan(s).
The above options for getting out of collections and student loan default are for federal student loans. Private loans do not have these resolution programs. Usually, private loan default can only be resolved through repayment. If you have a private loan in default, contact your lender to set up repayment terms.
Stay out of default
The best thing is to avoid collections all together is to stay out of default. If you’re falling behind or struggling to make student loan payments, consider changing your repayment plan or applying for deferment. If your loan is in collections, use this advice to get out of it!